In a preview of tonight's Bank of Japan (BoJ) meeting, Credit Agricole notes that as the USD/JPY pair returns above 140, Japanese policymakers have resumed verbal intervention in the forex markets. Hirokazu Matsuno, Japan's Chief Cabinet Secretary, stated that he is closely monitoring the FX markets and considers excessive movements undesirable.
Credit Agricole assesses the current level of verbal intervention at 3 on their 1-7 scale, with 7 indicating imminent foreign exchange intervention. The bank points out that for the verbal intervention to grab investors' attention, there would need to be references from policy officials about the currency being misaligned with fundamentals or experiencing excessive volatility.
Credit Agricole anticipates an escalation in verbal intervention, especially as they expect the Bank of Japan to maintain a dovish stance in the upcoming meeting. The bank's Japan economists predict that the BoJ will keep its policy parameters unchanged. They note that although Japan's GDP has outperformed expectations, labor earnings data indicates a significant shortfall in wage growth, which is unlikely to encourage the BoJ to modify its policy. Real wages fell by 3.0% YoY, and the data, which is from April, includes wage increases negotiated during spring wage negotiations.
Credit Agricole's economists maintain their view that the Bank of Japan is unlikely to adjust its monetary policy until the first half of 2025. This dovish stance, combined with concerns over the strengthening JPY, may lead to continued verbal interventions from Japanese policymakers.
Meanwhile, ING isn't expecting any surprises from the BOJ.
According to ING, the Bank of Japan (BoJ) policy announcement overnight is not expected to bring any significant surprises. ING recently withdrew its speculation regarding an adjustment to the yield curve control (YCC) policy in June, after BoJ officials made firmly dovish comments. However, as the market has priced in little to no chance of a hawkish surprise from the BoJ, ING believes the downside risks for the Japanese Yen (JPY) are limited.
ING's economics team still sees a possibility that the BoJ could make changes to its YCC policy by the end of July. Nonetheless, decisions by the Federal Reserve will play a significant role in influencing this outcome.
Interestingly, ING points out that further strength in the USD/JPY pair, possibly driven by carry trade strategies, might prompt Japanese authorities to resume foreign exchange intervention. This kind of intervention was previously deployed around the 145 level in September of last year.
While ING suggests that the USD/JPY pair might be nearing its peak, they also note that a reversal of the current bullish trend could take some time to materialize.
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